Putting every dollar into the stock market is risky, especially if you have to withdraw some money from your nest egg to keep up with living expenses. An all-stock portfolio introduces you to sequence-of-returns risk, as a correction would force you to sell more of your shares to keep up with living expenses.
Money market funds address this issue and minimize risk while providing a respectable return on your capital. You shouldn’t tuck away all of your money into these types of funds, but they offer low volatility and high yields for patient investors who want less drama.
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Money market funds do not have Federal Deposit Insurance Corp., or FDIC, insurance. That means they don’t have the same insurance as the money you leave in the bank. However, these funds invest in short-term government bonds and other low-risk assets.
Fund managers aim to preserve a net asset value, or NAV, price of $1 per share. Investors can choose whether to receive cash flow from their position or reinvest it into the money market fund.
Why Invest in Vanguard Money Market Funds?
Vanguard isn’t the only brokerage firm that offers money market funds, but few of them match the low expense ratios that helped turn Vanguard into a juggernaut. This ratio reflects the cost of doing business with a managed fund, and a lower rate means you get to keep more of your money. You’ll typically get a lower expense ratio if you invest in passively managed funds over actively managed funds.
During periods of high inflation, the Federal Reserve increases interest rates. While rate increases may hurt stocks, they increase money market fund yields. These funds are a valuable hedge against stock market corrections, especially if you like growth stocks. Furthermore, money market funds are liquid. You can withdraw from a money market fund at any time without penalty, while certificates of deposit, or CDs, often charge a penalty if you withdraw funds before the maturity date.
Money Market Fund Risks to Keep in Mind
Although money market funds can provide low-risk cash flow that’s higher than most savings accounts, these assets come with some concerns to keep in mind. Here are some of the factors to consider before allocating cash into money market funds:
Interest Rate Risk
The Federal Reserve has been cutting interest rates for a few years after raising them substantially in 2022. If the Fed continues to reduce rates, money market funds will produce lower yields since they rely on short-term government bonds. Though inflation has been moving up recently and the labor market has been somewhat resilient, discouraging a rate cut in the near future, the Trump administration has historically put pressure on the Fed to cut rates.
Inflation Risk
Inflation silently impacts the real returns of your investments. If a fund yields 3% but inflation is at 2%, then your real return is only 1%. That’s before taxes, which will apply to money market funds. Taxation on distributions varies with many factors, but any interest income is treated as ordinary income.
Some money market funds can produce negative real returns after adjusting for inflation and taxes. Stocks have a better chance of outperforming inflation, especially during bullish economic cycles. While investors may prefer the stability of money market funds, it’s important to assess the gap between your interest rate and the rate of inflation.
Default Risk
It’s possible for a bond issuer to default and be unable to pay an obligation. This outcome would hurt the fund’s value but is extremely unlikely because money market funds prioritize short-term bonds.
That said, Vanguard has several funds that offer investors yields, stability and low expenses. Here are five of the best money market funds available from Vanguard, with their fee and yield details as of May 12:
| Money Market Fund | 7-Day SEC Yield | Expense Ratio | Minimum Investment |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 3.6% | 0.11% | $3,000 |
| Vanguard Treasury Money Market Fund (VUSXX) | 3.6% | 0.07% | $3,000 |
| Vanguard New York Municipal Money Market Fund (VYFXX) | 2.4% | 0.11% | $3,000 |
| Vanguard California Municipal Money Market Fund (VCTXX) | 2.1% | 0.12% | $3,000 |
| Vanguard Municipal Money Market Fund (VMSXX) | 2.4% | 0.11% | $3,000 |
Vanguard Federal Money Market Fund (VMFXX)
The Vanguard Federal Money Market Fund has been around since 1981, has a 0.11% expense ratio and requires a $3,000 minimum investment. Investors right now enjoy a seven-day SEC yield of 3.6% as of May 12.
VMFXX invests most of its capital in U.S. government securities. The fund prioritizes short-term government bonds, which makes income more sensitive to changes in interest rates. The fund has 308 total holdings with an average maturity of 29 days. VMFXX closed out April with $375.5 billion in net assets.
Although bond holdings have interest rate sensitivity, government bonds overall are some of the safest investments available. The government can always print more money if it needs to cover any bond payments.
Vanguard Treasury Money Market Fund (VUSXX)
The Vanguard Treasury Money Market Fund also requires a $3,000 minimum investment to get started, and it carries a 3.6% seven-day SEC yield. The fund only has a 0.07% expense ratio, so you get to keep almost every dollar that the fund yields, prior to taxes.
VUSXX currently invests at least 80% of its assets in debt issued directly by the U.S. government. The actively managed VUSXX currently has 95.5% invested in U.S. Treasury bills and 4.5% in U.S. government obligations.
The fund has 31 holdings with an average maturity of 34 days. VUSXX prioritizes high cash flow and liquidity, and that strategy has attracted $107 billion in assets.
[Read: 5 Best S&P 500 Index Funds to Buy for 2026]
Vanguard New York Municipal Money Market Fund (VYFXX)
The actively managed Vanguard New York Municipal Money Market Fund also has a $3,000 investment minimum, but it has some notable differences in expense ratio and yield from some of the other funds on this list.
New York investors still get a low 0.11% expense ratio, which is only slightly higher than the other funds’ costs. Investors also receive a 2.4% seven-day SEC yield as of May 12. The fund is designed for New Yorkers in a higher tax bracket who have a short-term savings goal and don’t want to pay taxes on their cash flow. It’s also considered one of Vanguard’s most conservative investment options, according to the fund website. At least 80% of the fund’s total assets are in high-quality, short-term New York municipal securities.
VYFXX prioritizes securities that are exempt from federal and New York personal income taxes, and it aims to maintain a net asset value of $1 per share. It has 354 holdings with an average maturity of 11 days. VYFXX has $3.5 billion in total net assets and is on a monthly distribution schedule.
For a New Yorker in the highest possible tax bracket, the tax-equivalent yield for a 2.4% tax-free yield is 4.98%. This means a taxable money market fund would need to yield roughly 5% just to leave you with the same amount of cash after the IRS, state and city take their cut.
Vanguard California Municipal Money Market Fund (VCTXX)
This actively managed fund is a California resident’s equivalent of VYFXX. It seeks to invest at least 80% of its assets in high-quality, short-term California municipal securities that are exempt from federal and state income taxes. Right now, all of its assets are invested in those types of securities.
VCTXX has a 0.12% expense ratio and $3.9 billion in total assets. The fund requires a $3,000 minimum investment to get started. VCTXX has 244 holdings with an average maturity of 14 days. It’s a low average maturity for investors who are worried about rate cuts, but the fund still has desirable tax benefits for Californians.
VCTXX investors reap monthly distributions to the tune of a 2.1% seven-day SEC yield as of May 12.
Vanguard Municipal Money Market Fund (VMSXX)
The Vanguard Municipal Money Market Fund offers broader exposure to municipal bonds for investors who aren’t located in New York or California. Started in 1980, the actively managed fund has a 0.11% expense ratio and a 2.4% seven-day SEC yield as of May 12. You’ll have to deposit at least $3,000 to start a position in this fund.
The fund maintains a net asset value of $1 per share while allocating capital into securities that are exempt from federal personal income taxes. The low-risk fund has $18 billion in total assets that are spread across more than 1,000 holdings. Securities in the fund have an average maturity of 16 days.
VMSXX won’t beat the S&P 500 during bullish cycles, but it offers more stability during economic slowdowns. For some investors, that provides some peace of mind in today’s unpredictable market.
For investors in the 37% tax bracket, this fund’s tax-equivalent yield is 3.8% at the federal level. Investors may still owe state and local taxes depending on their residency.
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The Best Vanguard Money Market Funds originally appeared on usnews.com
Update 05/14/26: This story was previously published at an earlier date and has been updated with new information.
